2018 Financial Stability Report

Figure 36: Solvency Metrics - Insurers

with additional challenges, given the negative relationship between interest rates and the value of investment instruments. The risk here is that the value of assets can potentially fall below what is required for solvency margins. Thirdly, the sovereign debt exposures of insurance companies always require close monitoring. Insurance companies hold a large stock of government debt on their balance sheets. Therefore, whenever concerns over fiscal sustainability are brought to the fore, it can negatively affect insurance companies, especially if the instruments are marked to market. These effects can lead to solvency issues as the value of assets held for solvency purposes decreases. The introduction of IFRS 17 is likely to present significant costs and implementation challenges for firms. IFRS 17 is a new accounting standard for insurance contracts, and is expected to come into force in 2022. This standard will change the basis for profit recognition on insurance contracts. Conversion to the standard is likely to have the effect of reducing retained earnings, with a knock-on effect through firms’ ability to pay dividends.

0.0% 20.0% 40.0% 60.0% 80.0%

Per Cent (%)

2015 2016 2017 2018

Capital to Total Assets Net Premiums to Capital

Source: SRUs and Eastern Caribbean Central Bank (ECCB)

Liquidity across the sector was high with composite and non-life insurance companies retaining higher levels of liquidity due to the nature of their business. Life insurance companies retained lower levels of liquidity as their liabilities are mostly long term. Risk Assessment Systemic risk in the ECCU insurance sector is the occurrence of large catastrophic hurricanes as was witnessed with hurricanes Maria and Irma. These events can quickly diminish an insurance company’s capital base due to large claims, especially if the hurricanes cover more than one country in which the insurance company operates. Secondly, the current low interest rate environment poses significant challenges for insurers, especially life insurance companies. At the same time, rising interest rates come 3.1

Financial Stability Report 2018

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